The International Swaps and Derivatives Association (ISDA) annual general meeting takes place in Tokyo this week. The event serves as a platform for insightful discussions, strategic collaborations, and the exchange of ideas surrounding the latest trends, challenges, and innovations in risk management.  

While we couldn’t be in attendance this year, several agenda items caught our eye which compelled us to write this blog. By focusing on key topics, we aim to offer comprehensive insights into the most pressing issues shaping the industry's trajectory. Let’s dive in.  

Navigating Novel Risk 

Unsurprisingly high on the ISDA agenda this year is how firms are managing novel risk. With inflation and interest rates climbing, the 'Global Market Outlook' panel will delve into how economies worldwide are grappling with this financial turbulence. In the aptly named ‘Managing Disruption’ session, discussion will centre on the intricate task of navigating risks amid geopolitical turmoil as exemplified by Russia's actions in Ukraine.  

These topics highlight the imperative for banks to fortify their strategies and resilience in an increasingly volatile landscape. But one major area that we have noticed that is being affected because of this novel risk is a rise in expected credit loss (ECL).  

The Fuse Household Index, which analysed the annual reports of 20 of the UK’s biggest lenders to assess ECL (encompassing a range of financial risks including expected customer defaults, the impact of inflation as well as changes to the size of the loan book), made some concerning findings. They found that the largest lenders are expecting to lose an added £788M over the next 12 months as the cost of living crisis continues, and borrowers face rising costs which they are struggling to meet. 

The discussions surrounding novel risks at the AGM underscore the critical importance for banks to enhance their strategic resilience in the face of evolving economic and geopolitical challenges. The rise in ECL serves as a stark reminder of the financial impacts stemming from global uncertainties, emphasising the need for proactive risk management strategies in navigating the complex landscape of today's financial markets. 

Trading Talk 

In a panel discussion titled 'View from the Trading Desk', experts from leading financial institutions will be addressing the factors shaping trading strategies in 2024 and how firms are adapting to the current macroeconomic and market landscape. No doubt they will be exploring the challenges and opportunities facing traders amidst evolving economic conditions and market dynamics, and how to navigate the complexities of the trading landscape.  

Given the backdrop of noteworthy events in 2023, including peak inflation and interest rates, the US regional banking crisis, and the collapse of Credit Suisse, alongside softness in capital markets activity, geopolitical conflicts, ongoing energy transition and decarbonisation, and a continually evolving regulatory landscape, the discussion is bound to be rich with analysis.  

In 2024, there are grounds for cautious optimism, and many analysts expect a more “normal” financial markets landscape. The macroeconomic picture is improving. Inflation is easing, and central banks are expected to cut rates during the year. M&A activity increased over 20% in the fourth quarter of 2023 compared to the third quarter. Risk appetite is returning among investors as evidenced by recent fund flows. Nevertheless, uncertainties remain, including high-impact elections, ongoing geopolitical turmoil, and unforeseen events, which may influence market dynamics in unexpected ways.  

Basel III Shake-Up Hits Trading Floors 

No industry event would be complete without a discussion on a major piece of regulation that is affecting the market - Basel III, especially as now all major jurisdictions have published proposed rules to implement the final measures.  In a panel entitled ‘Counting the Cost of Capital Reforms’ experts will be discussing rule divergence, the increased reliance on standardised approach models and the increase in capital for market risk, ultimately debating how these will changes impact trading businesses, and how are banks are adapting to these changes.  

The new regulatory requirements regarding capital and liquidity will be another constraint for banks—especially their capital-intensive trading arms. The added capital needed in the recent Basel III “endgame” rules for US banks who have over US$100B in assets, will affect capital allocation to proprietary trading and plans for market expansion.  

Furthermore, these rules could materially constrain large banks’ ability to support capital markets activities as counterparties in financial derivatives, further elevating the cost of capital for the end users as well. 

Leveraging Analytical Solutions 

It's clear that the discussions and insights at this year’s ISDA will provide valuable perspectives on navigating the complexities of today's financial landscape. The emphasis on managing novel risks amidst economic turbulence and geopolitical disruptions underscores the need for banks to bolster their strategies and resilience. The rise in expected credit loss (ECL) due to the cost-of-living crisis serves as a stark reminder of the challenges faced by financial institutions in mitigating risks and adapting to changing market conditions. 

Further, trading strategies considering evolving economic conditions and regulatory reforms highlight the dynamic nature of the financial industry. With the Basel III shake-up looming large, banks are tasked with navigating increased capital requirements and regulatory complexities while staying agile in their trading approaches.  

The imperative for banks to adapt to new regulatory landscapes while effectively managing market dynamics underscores the importance of using advanced analytical solutions. These tools offer valuable insights and enable financial institutions to find vulnerabilities, optimise strategies, and enhance decision-making processes, ultimately contributing to greater resilience in the face of uncertainty. As the industry continues to evolve, proactive adaptation and strategic planning will be essential for financial institutions to thrive in an ever-changing environment.